- Montana and Rhode Island Address Insurer Price Optimization
- October 19, 2015
- Law Firm: Colodny Fass P.A. - Sunrise Office
- Montana and Rhode Island have become the most recent states to address "price optimization," with Montana issuing an outright ban on the practice.
Summaries of each states' respective announcement are below:
In a recent Advisory Memorandum to all property and casualty insurance carriers, Montana Commissioner of Securities and Insurance Monica J. Lindeen instructed any insurers using a rating plan employing price optimization to both notify her agency and file an updated rating no later than February 1, 2016.
Further, the Montana Securities and Insurance Commission will deny any rating plan submitted in the future that uses price optimization, she added.
Concluding that price optimization is both illegal and unfairly discriminatory under Montana law, the agency defines the practice as " . . . the practice of varying rates based upon factors not related to risk of loss, or based upon otherwise risk-related factors applied for a purpose other than to determine risk of loss."
Examples of price optimization modeling techniques given by Montana's Advisory Memorandum include:
- Application of factors such as the occurrence and frequency of a consumer's complaints
- The length of time a consumer has been with an insurer
- The likelihood that a consumer will shop around with other insurers
- Other factors indicative of price sensitivity
- Front-loading of administrative expenses for consumers deemed less likely to remain with an insurer indefinitely
Issued the same day as that of Montana's, Rhode Island's Insurance Bulletin Number 2015-8 specifies that its policy on price optimization is confined to personal lines policies and offers a partial definition of the practice, explaining that there is no universally accepted definition for it.
Rhode Island Superintendent of Insurance Joseph Torti III reminded insurers that rates must not be " . . . excessive, inadequate or unfairly discriminatory . . ." He explained that a rate will be considered unfairly discriminatory if its price differentials fail to reflect equitably the differences in expected losses and expenses for different classes of policyholders.
Bulletin 2015-8 states that "Both base rates and rating classes must be based on factors specifically related to an insurer's expected losses and expenses." (Emphasis added). While insurers may employ judgment in setting their rates, judgmental adjustments to a rate may not be based on non-risk related factors such as "price elasticity of demand" which seek to predict how much of a price increase a policyholder will tolerate before switching to a different insurer. The Bulletin adds that the use of such factors not only unfairly discriminates between policyholders of the same risk profile, but is also directly in conflict with the statutory principles that underlie Rhode Island's "open and competitive" property and casualty marketplace. (Emphasis added).
The Rhode Island Department of Business Regulation noted that it does not intend for Bulletin 2015-8 to prohibit or restrict such practices as "capping" or "transitional pricing" if applied on a group basis. It added that insurers should group individual policyholders into credible risk-based classifications and treat similarly situated policyholders the same with respect to insurance pricing.
Likewise, the use of sophisticated data analysis to develop finely tuned methodologies with a multiplicity of possible rating cells is not, in and of itself, necessarily a violation of Rhode Island's rating laws, as long as the classifications are based strictly on risk of loss and not on willingness to pay or "elasticity of demand."
Nevertheless, Superintendent Torti cautioned that any insurer using price optimization to rate policies delivered or issued for delivery in Rhode Island should submit revised filings that remove such factors within 60 days after the date of the Bulletin. Insurers must also disclose in SERFF-Question #17 of the RI Rate Procedural Informational Summary Form whether the company uses non-risk-related factors such as price optimization or elasticity of demand in order to help determine personal insurance premiums.
Insurers with currently pending rate filings should amend them to disclose this information, if applicable. Companies that fail to do so and are later determined to have used price optimization or elasticity of demand or failed to disclose such use to Rhode Island's Department of Business Regulation may be subject to disciplinary action.